3 Pros and Cons of Cash-Back Credit Cards, According To Ramit Sethi
Written by
Gabriel Vito
Edited by
Amber Barkley
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Cash-back credit cards offer a simple way to earn rewards by providing a percentage back on everyday purchases. In a post on his website, personal finance expert Ramit Sethi emphasized choosing the right credit card to align with your financial goals, advocating for simplicity and efficient financial management.
Pros of Cash-Back Credit Cards
A cash-back card can be a powerful tool — if you use it right. Here’s the argument for having a cash-back credit card.
Simplicity and Accessibility
As Sethi wrote, cash-back cards are straightforward and easy to use, as they automatically apply a rebate to your account balance, which is ideal for those who value ease over reward maximization — unlike travel cards, for example, which may require a learning curve to optimize your points.
Financial Responsibility
Cash-back cards promote responsible spending by offering simple, direct rewards. This structure provides a clear benefit for every purchase, discouraging extraneous spending and helping users stick to their budgets to enhance financial stability.
Wide Applicability
Cash-back cards deliver consistent rewards on various everyday purchases, such as groceries, gas and utilities. Their versatility makes them suitable for regular use, allowing consumers to earn rewards on all transactions.
Cons of Cash-Back Credit Cards
While they might be a good fit for some, cash-back credit cards aren’t right for everyone. Here’s why.
Lower Reward Potential
Cash-back cards typically offer simpler rewards, but often at lower rates, especially compared to travel rewards cards, which can provide higher value through redemption options like flights and hotel stays.
Potential Fees
Some cash-back cards carry annual fees or charge foreign transaction fees, which can eat into the cash back you earn, reducing the net benefit, especially if your spending isn’t high enough to offset these costs.
Encouragement of Extra Spending
Sethi wrote, “If you carry any interest on the card, you’ll lose more money than you’ll ever get in cash back.”
The incentive to spend more to gain more cash back can lead to increased debt, counteracting the benefits of the card, especially if you let your balance grow instead of paying it off every month.
Comparing Cash Back With Other Types of Credit Cards
Understanding your options is an important part of choosing a credit card, so here are some other types of cards you might consider.
Travel Rewards Cards
These are suited for frequent travelers who can navigate complex points systems and enjoy travel-related perks, although they often come with higher fees.
Some travel cards have no annual fee and less valuable rewards, while others have an annual fee with added benefits.
Balance Transfer Cards
These offer a temporary reprieve from interest, which is useful in a strategic debt reduction plan but not a long-term solution, Sethi wrote. He suggested only using a balance transfer card if “cash is really tight.”
Premium and Business Cards
Targeted at high spenders or business owners, these cards offer substantial perks but require careful consideration of fees and spending patterns.
Sethi’s Philosophy on Using Credit Cards
Sethi views credit cards as tools for financial empowerment, advocating for their use in a way that aligns with personal financial goals. He advised paying off balances in full to avoid interest and maximize the rewards you earn without overspending.
Conclusion
Choosing the right cash-back credit card involves weighing its simplicity and ease of use against its potential to encourage unnecessary spending. As Sethi wrote, it’s crucial to use credit cards strategically to support — not undermine — your financial objectives. By carefully considering your needs and habits, you can select a card that complements your lifestyle and enhances your financial health.
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